On Tuesday, Dish proposed a deal that would pay Clearwire holders $3.30 per share, up from $2.97 per share offered by Sprint. The Dish offer is highly complex and conditioned on obtaining benefits for Dish that Sprint says violates its contractual and shareholders rights.

But assuming Dish and Clearwire can negotiate a deal they think gets around all this, could there then be a no-holds-barred bidding war between Sprint and Dish for Clearwire with share prices soaring way over the $3.30 Dish bid? Unlikely.
Thursday’s Journal reports that Dish’s objective is to obtain at least some of Clearwire’s spectrum, not necessarily full ownership of Clearwire. After all, Sprint already owns a majority of the Clearwire shares. Unless Sprint decides to sell, Dish will not obtain control of Clearwire.

Hence, we have Dish’s complex proposal that in return for selling Dish the spectrum it wants it will reward Clearwire’s shareholders with that $3.30 per share offer which does not buy Dish control (unless Sprint sells).

There is one obvious question: Why didn’t Dish go directly to Sprint and negotiate the spectrum purchase and cut out the bonus offer to Dish shareholders, which results in Dish paying a premium for a minority interest in Clearwire that Dish probably doesn’t need?

Perhaps it tried and was rebuffed by Sprint. But perhaps not, due to possible contractual rules. In connection with negotiating its deal with the Clearwire independent committee, Sprint entered into a non-disclosure agreement on November 20 of last year. Clearwire was required to enter into a similar non-disclosure agreement with Dish before negotiating with it. The terms of these agreements have not been disclosed, but it is probably a safe bet that they have a so-called “anti-clubbing” provision. Clubbing refers to multiple buyers working together (which private equity firms frequently do) and an anti-clubbing provision prohibits one bidder from working with a competing bidder without the approval of the target’s board.

The question now becomes, can the Clearwire independent committee withhold that approval and force Sprint and Dish to continue to compete with each to get what they want, creating a potential massive bidding war? Probably not.

Assuming Clearwire’s independent committee finds a path through the complexities and Sprint’s objections toward a Dish deal, it seems likely that before the bidding goes any higher than $3.30 there will be a three-way negotiation among Sprint, Dish and Clearwire. Here’s why. What is likely to happen if Clearwire decides to support a Dish deal is Sprint will sue Clearwire and Dish, claiming that the Dish deal violates Sprint’s contractual and shareholder rights, making arguments similar to those they have already made.

Of course it is possible that Clearwire and Dish will be able to quickly win that lawsuit, which could force Sprint to offer a higher price if it wants to stay in the game. However, these issues appear complicated and quick action in litigation is unusual.

But Clearwire needs quick action. It needs financing, which is why Sprint offered Clearwire up to $800 million of financing to tide it over until the closing of the Sprint deal. Because of the equity component in that financing, Dish says its deal blows up if Clearwire draws on the financing. And under the terms of the Sprint merger agreement with Clearwire, Clearwire is not permitted to borrow money from Dish. So if this deal drags on, Clearwire could be between a rock and a hard place as Clearwire is starved for cash. Clearwire needs clarity sooner rather than later.

That means that Clearwire will be highly incentivized to see a settlement or avoidance of litigation over the Dish deal to get matters resolved and to turn on the financing spigot from one (or both) of the bidders. One never knows whether the parties will in fact settle (Sprint or Dish could take a hard line), but we can be pretty sure Clearwire will want to make it happen.

And once Sprint and Dish start talking to each other, they have no incentive to offer more to Clearwire shareholders. We should expect those negotiations to be a discussion of who gets what out of Clearwire’s assets, not one in which each tries to give more value to Clearwire’s shareholders.

Sprint will still need a majority of the minority of Clearwire’s shareholders to approve its deal, which is why one would expect at least some improvement in Sprint’s $2.97 per share price and possibly coming close to or even meeting Dish’s $3.30 current nonbinding proposal.

But with Clearwire needing financing, it is likely to be subjected to the M&A version of the golden rule: he who has the gold makes the rules. And Sprint and Dish have the gold. Don’t look for a lot more of it to be sprinkled on Clearwire shareholders beyond the $3.30 price.

Comments (2 of 2)

I still am puzzled with the January (or was it Feb) 2012 contract that Sprint agreed to sign with Clearwire. Remember that. What happened to it? Does not Sprint owe Clearwire a flat rate of 1 billion dollars in 2013 for the use of Clearwires network. Why would that payment not be included as funds available to help them hold their own in this game.

4:10 pm January 10, 2013

DPSL wrote :

Ron,

You comments are well thought out except for one problem, Clearwire has about $1.1B in cash on hand. If they simply delay the LTE network upgrades they are doing, their cash burn rate is about $150M per quarter. The only demand for a larger cash flow is to continue the LTE build-out on a schedule which they control and can quite frankly be delayed as the LTE devices to work on their network won't be available until mid to late summer.

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